Section 40

Section 40: cost of acquisition of certain assets later sold as stock-in-trade

Section 40 fixes how the "cost of acquisition" is computed, for purposes of the business income head, when an asset that came to the assessee through amalgamation, gift, will, an irrevocable trust, or partition of a Hindu undivided family is later sold as stock-in-trade.

This explanation is AI-assisted and pending review by our CA/CS team. It is general information, not professional advice - always cross-check against the bare law text above or talk to our tax team for guidance specific to your situation.

What Section 40 covers

Section 40(1) applies to an asset that becomes the property of (a) an amalgamated company under a scheme of amalgamation, or (b) an assessee through a gift, will, an irrevocable trust, or total/partial partition of a Hindu undivided family - and which is subsequently sold as stock-in-trade.

In such cases, the cost of acquisition, for computing income under "Profits and gains of business or profession", is the sum of: the cost of acquisition of the asset in the hands of the amalgamating company (for amalgamation cases) or the transferor/donor (for gift/will/trust/partition cases); any cost of improvement made to the asset; and any expenditure incurred by that amalgamating company, transferor or donor wholly and exclusively in connection with the earlier transfer.

Exclusion

Section 40(2) states that this section does not apply to an asset referred to in Section 67(6).

Frequently asked questions

When does Section 40 apply?

Only when an asset acquired through amalgamation, gift, will, an irrevocable trust, or HUF partition is later sold by the assessee as stock-in-trade (i.e., as part of a trading/business activity), and the resulting income is computed under the business income head.

How is the cost of acquisition worked out in these cases?

It is the sum of the previous owner's (amalgamating company's, transferor's or donor's) cost of acquisition, any cost of improvement made, and any expenditure that previous owner incurred wholly and exclusively in connection with the earlier transfer to the assessee.